DBRS Confirms Canadian Hydro Developers, Inc. at BBB, Stable Trend

DBRS has today confirmed the ratings of the Senior Unsecured Debentures of Canadian Hydro Developers, Inc. (CHD or the Company) at BBB, with a Stable trend. The confirmation reflects CHD’s fully contracted portfolio with investment-grade counterparties, which minimizes its commodity pricing risk, as well as the financial and operational support of CHD’s indirect owner, TransAlta Corporation (TAC; rated BBB). The confirmation also reflects DBRS’s expectation that the integration between CHD and TAC will remain strong, with TAC indirectly owning over 50% of CHD over the long-term (80.7% as of December 31, 2013). TAC’s rating currently acts as a ceiling to CHD’s rating; however, a rating differential between TAC and CHD could ultimately result if TAC’s ownership decreases significantly from current levels as CHD is viewed on a stand-alone basis.

CHD’s business risk profile is in the BBB range. As part of the sale to TransAlta Renewables Inc. (TransAlta Renewables) in August 2013 (the Transaction), CHD entered into power purchase agreements with TAC for its merchant wind and hydro facilities. As a result, CHD’s portfolio of generating facilities is now fully contracted with investment-grade counterparties at reasonable maturities, which eliminates the Company’s exposure to commodity pricing risk. This should reduce the volatility of earnings and cash flow for CHD going forward. Re-contracting risk in the near to medium-term for the Company also remains reasonable as only 4% of capacity faces renewal risk over the next ten years. CHD’s key challenge is its renewable resources risk, including changes in wind flows and hydrology. Variability in earnings and cash flows will primarily be driven by changes in generation volumes, which are very sensitive to wind and hydrological conditions.

CHD’s key credit metrics are well within the BBB range and are supported by the Company’s relatively stable cash flows and its historically low debt levels following TAC’s acquisition of CHD in 2009. In 2013, the Company’s leverage increased moderately due to the return of capital to TAC (approximately $479 million) as part of the Transaction, which reduced CHD’s equity base. However, CHD’s financial profile remains reasonable for the current rating. In the near term, the Company is expected to generate positive free cash flow due to its relatively low maintenance capital expenditures requirements. Any excess cash flow will likely be distributed to TransAlta Renewables through its related party loans with CHD and/or a dividend.

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Non-Regulated Electric Generation Industry (January 2014), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.